Where Will Rates be in 2025?
Here’s a quick look at what the experts are saying when it comes to interest rates in 2025 and the coming 5 years.
Who controls interest rates?What will interest rates be in 2025?Australia’s projected interest rates in 5 years
From record lows of 0.10% in November 2020 to 13 interest rate rises across just 15 months, there’s no denying that Australians have experienced their fair share of highs and lows when it comes to interest rates over the past few years.
There’s been a lot of speculation about where interest rates will go in 2025 and over the next 5 years. Here’s a quick look at what the experts are saying when it comes to interest rate news. But first, who’s responsible for setting the interest rates in the first place?
Who controls interest rates?
The Reserve Bank of Australia (RBA) is the country's central bank and is responsible for developing and implementing monetary policy. One of its key functions is to set the official cash rate, which is essentially how much it costs banks to borrow from each other. This cash rate then influences the interest rates charged by banks and lenders on home loans.
The RBA adjusts the cash rate to achieve its goals of price stability and full employment while ensuring the economic prosperity and welfare of the Australian people. The decision on the cash rate is made by the Reserve Bank Board, which meets eight times a year, spanning across two days each time to review economic conditions and set the rate accordingly. The meetings start on a Monday afternoon and conclude the following day.
Once the official cash rate is determined by the RBA, Australian banks and lenders then set their own interest rates for home loans based on the cash rate and several other key costs, including:
The cost of funds
The cost of insurances
The cost of capital reserves
The lender’s margin
In a nutshell, when the RBA increases the cash rate, it makes it more expensive for banks and lenders to borrow money themselves. As a result, they then pass this increase on to their borrowers by raising their own home loan interest rates. This, in turn, makes it more expensive for you to take out a mortgage.
It is an interestng time as we have seen recently NAB decrease rates for new borrowers by 60 basis points while the RBA have left rates on hold. This shows a renewed appetite for some lenders to want new mortgage business and makes for a competitive market. And in effect why its a good time to discuss your existing position with a broker as different lenders and making cuts at ubusual times.
What will interest rates be in 2025?
So, what can you expect when it comes to interest rates in 2025? As of November 2024, Australia’s current interest rate is 4.35%. This is a far cry from the 0.10% we experienced just 4 years ago, which is causing grief for a lot of Aussie homeowners who may have overextended themselves to get into the property market back when the interest rate was lower than today.
The official cash rate has been left on hold since the last rise in November 2023.
According to a recent article by the Australian Financial Revew, Australia is expected to be one of the last major advanced economies to cut interest rates. The reasoning behind ths is that inflation took off later in Australia and the RBA didn’t raise rates as much compared to other economies. Some economists are anticipating a longer period of rates on hold and we do have a lag compared to the US.
For instance, in April 2023 economists and traders thought the RBA would have already cut interest rates by this stage, with economists in the April 2023 survey forecasting a rate cut in February 2024. As we now know, this prediction hasn’t come to fruition and interest rates are still on hold. This just goes to show how quickly economic predictions and interest rate forecasts can change over a short period of time.
Australia’s projected interest rates in 5 years
The RBA’s official cash rate is based on several different factors, including inflation, the economic growth rate and unemployment. With so many moving parts in the mix, it’s incredibly difficult to forecast future interest rates. Especially over a number of years.
Ultimately, the aim of the RBA is to maintain a stable financial system by:
Maintaining a target inflation rate between 2% and 3%,
Maintaining a low level of unemployment, and
Promoting the economic prosperity and welfare of the Australian people.
With this in mind, the RBA will develop monetary policy and adjust the cash rate to achieve its financial goals.
There are a lot of different interest rate predictions floating around at the moment, but it’s important to take everything you hear with a pinch of salt. Unfortunately, no one has a crystal ball to be able to say for sure where interest rates will go in the future, so it’s important to base any financial decisions on your current circumstances. Don’t be tempted to spend money that you can’t afford if you’re banking on interest rates decreasing in the near future.
At Finoptix, we can’t guarantee what the interest rates will be in 2025 or what they’ll look like over the next 5 years. With that said, if you’re looking for peace of mnd and a review of your current loan we are here to help.